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Bolivia's Nationalization of Oil and Gas

Author: Carin Zissis
May 12, 2006
This publication is now archived.

Introduction

On his hundredth day in office, Bolivian President Evo Morales moved to nationalize his nation's oil and gas reserves, ordering the military to occupy Bolivia's gas fields and giving foreign investors a six-month deadline to comply with demands or leave. The May 1 directive set off tensions in the region and beyond, particularly for foreign investors in Brazil, Spain, and Argentina. Morales' nationalization agenda has been described as another chapter in Latin America's turn to the left, and fears are rising that the Bolivian leader has fallen into the fold of Venezuela's Hugo Chávez and Cuba's Fidel Castro. But some experts emphasize there may be more infighting than cohesion overall in the region.

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Why did Morales nationalize Bolivia’s hydrocarbon industry?

Morales, a former coca farmer and union leader, won a resounding victory in the December 2005 elections. As the Movement to Socialism (MAS) candidate, he campaigned in favor of nationalizing, among other sectors of the economy, the gas and oil industries with the cooperation of foreign investors. Experts say that, given such promises, the nationalization was no surprise. But Peter DeShazo, director of the Center for Strategic and International Studies' Americas Program, says the move to occupy the gas fields with military forces lent a dramatic effect. "The confrontational nature of his move was certainly intended to get people's attention," he says, adding that Morales may be looking to garner votes in July elections for a constituent assembly that will redraft Bolivia's constitution.

Nouriel Roubini, a professor of economics and international business at New York University, says one explanation for nationalization is ill will over encroachment on Bolivia's territory by its neighbors. Since gaining independence in 1825, the Andean nation lost ocean access to Chile, as well as land to Brazil, Paraguay, and Peru. "There is this kind of historical resentment," Roubini says, adding that Bolivians "are giving a slap in the face to Brazilians and Spaniards." Morales echoed this sentiment at a May 11 summit of Latin American and European leaders, where he reaffirmed his energy-nationalization plans and signaled his government would seize large land holdings. Experts say this could also affect Brazil, whose farmers have major land holdings in Bolivia.

In spite of having the region's second largest natural-gas reserves after Venezuela, Bolivia is among Latin America's poorest nations. The landlocked country has also been marked by political instability; six presidents have held office in as many years, and one of them, Gonzalo "Goni" Sánchez de Lozada, was forced to resign in 2003 after protests against plans to export Bolivian gas turned violent. Among the free trader's opponents was Morales, who said foreign investors received too much in gas-sale profits based on the hydrocarbons law in place at the time.

How will the nationalization plan work?

Morales' May 1 decree states that foreign companies, which have invested almost $4 billion since Bolivia opened up its energy sector in the late 1990s, must hand majority control over to state-owned Yacimientos Petrolíferos Fiscales Bolivianos (YPFB). Firms have 180 days to renegotiate energy contracts with the Bolivian state, which experts say will likely lead to price increases. During that time, the companies which own the two largest oil fields will absorb a 32 percent hike (82 percent total) in royalties and taxes. Bolivia, which has 55 trillion cubic feet of natural gas, is expected to see a jump from $320 million to $780 million in annual oil-related revenues, and has installed new directors representing YPFB on the boards of foreign firms' local subsidiaries. While negotiations occur, Bolivia will conduct an audit of the foreign companies. Morales recently warned foreign companies they will not be compensated if they have recovered their original investments.

Who stands to lose from the nationalization policy?

The firms with the largest holdings in Bolivia's energy industry are the Spanish-Argentine venture Repsol YPF and Brazil's Petrólio Brasileiro (Petrobras). Britain's British Petroleum (BP) and France's Total also have large investments. Repsol YPF has invested some $1.2 billion in Bolivia's energy industry, and Argentina's President Nestor Kirchner, whose country faces double-digit inflation rates, is concerned about rising gas prices jeopardizing Argentina's economic recovery. But Brazil is under the greatest pressure if prices go up, as Bolivia provides it with about half of its gas. In the populous economic center of Sao Paolo that figure is closer to 75 percent. Petrobras has invested $1 billion in Bolivia's natural-gas industry. Morales' move has put Brazilian President Luiz Inácio Lula da Silva in a vulnerable position in the months leading up to his October reelection bid.

What are the reactions to Morales’ plan?

While foreign companies said they hope for cooperation, Repsol YPF has said it will act to protect its investments and take legal action if necessary. Petrobras has made similar threats and frozen investments. Experts say Bolivia needs investors such as Petrobras, which accounts for roughly 20 percent of the country's gross domestic product (GDP) and 24 percent of its tax revenue. John Williamson, senior fellow at the Institute for International Economics, says Bolivia may see short-term gains but in the long term, it's going to lead to less foreign investment. He also cautions that Morales' move could cause divisions in the region.

Is Bolivia’s nationalization testing regional alliances?

Yes, say some experts. CFR Senior Fellow Julia Sweig says that Lula has been more silent in coming out against the nationalization than Spain's President José Luis Rodríguez Zapatero because Lula—a former trade union leader like his Bolivian counterpart—is "sympathetic" to Morales' intentions. Diego von Vacano, assistant professor of political science at Texas A&M University and a Bolivian national, says, "Lula wants to prevent a sort of face-off with Morales" because he "doesn't want to destabilize the region."

Yet, not all Latin American leaders who are leaning to the left are the same, experts say. "On one side, you have a number of administrations that are committed to moderate economic reform," says Roubini. "On the other, you've had something of a backlash against the Washington Consensus [a set of liberal economic policies that Washington-based institutions urged Latin American countries to follow, including privatization, trade liberalization and fiscal discipline] and some emergence of populist leaders." Among the latter group is Venezuela's Chávez, an outspoken opponent of the Bush administration; DeShazo of CSIS calls Chávez Latin America's "high priest" of economic nationalism.

What is Morales’ relationship with Chávez?

Just before the May 1 decree, Morales met with Chávez and Castro in Havana to sign a socialist trade agreement that made Morales a member of the Bolivarian Alternative for the Americas. The three are now calling it the "Axis of Good," a pact originally signed by Chávez and Castro last year. Morales and Chávez threatened to pull out of the Andean Community if Colombia, Peru, and Ecuador sign free trade agreements with the United States. Castro and Chávez also said they would become Bolivia's primary soybean importers. This plan may affect Brazil, because Morales has set a May 31 deadline for land redistribution in the Santa Cruz region, where Brazilian farmers grow more than a third of Bolivia's soybeans and have invested heavily in land and agriculture.

But experts caution that it is not yet clear where Morales' alliance falls. Sweig says "the embrace he's getting from Chavez is getting harder and harder to resist," but he also "understands that he has to function in a global context and not just an Andean one." Sweig adds, "Bolivia is going to tack one way one day and one way the other." There are also signs of infighting rather than a growth in alliances in the region. The Andean Community is not the only trading bloc with members threatening to bow out; in April, Uruguay warned it may leave Mercosur, the Southern Cone trading bloc, and suggested Paraguay is a partner on this. Williamson says the region "is more divided than I've ever seen it." Sweig echoed this, saying, "I just don't see the kind of diplomatic skill and institutional capacity to do alliance building. It's not like the EU."

What is the U.S. role in Bolivia and in the region?

Experts say the United States has paid less attention to Latin America after September 11, 2001, particularly as events have heated up in the Middle East. Meanwhile, Roubini says the situation in the region is "developing in such a way that is actually dangerous to U.S. interests." According to Von Vacano, this period of crisis diplomacy between countries in the region would be a good time to become more engaged, and that the United States is "missing a chance to be a kind of broker, to get involved in South America without being heavy-handed." Williamson says the United States should maintain an open hand to negotiate free trade agreements but "any U.S. influence is resented so much that it is counterproductive." Sweig says the United States should tread carefully because intentions to influence outcomes can backfire. She points to Bolivia's 2002 election, when the U.S. Ambassador Manuel Rocha urged Bolivians not to vote for Morales, who then surged in the polls and almost defeated Sánchez. The problem, Sweig says, "is when we say 'democracy,' Latin Americans hear 'imperialism.'"

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